This survey round also contains a set of ad hoc question addressing the effect of the current credit market events on credit standards and lending. The credit market events have had a different impact on credit standards depending on the loan segment. Loans and credit lines to enterprises were more affected than loans to households. More banks expect the recent developments in credit markets to have an effect on credit standards over the next three months than was seen over the past three months.
Banks generally reported that the recent turmoil in the credit markets has hampered the conditions of access to wholesale funding over the past three months, and may hamper funding over the next three months. Banks’ willingness to lend over the next three months may be affected, to some extent, by the effect of the credit market events on the costs related to the banks’ capital position.
Loans or credit lines to enterprises
Credit standards: Reflecting the credit market turmoil affecting euro area banks over the past weeks, credit standards for loans or credit lines to enterprises tightened in net terms in the third quarter of 2007 (31% compared with -3% in the previous quarter). This follows a long period where credit standards remained basically unchanged or were slightly eased. It may furthermore be noted that virtually all banks, which tightened credit standards on loans to enterprises, reported that they “tightened somewhat” rather than “tightened considerably” . For the first time since the inception of the survey, competition from other banks contributed towards a net tightening of credit standards. Banks’ capital and liquidity position and their access to market funding also contributed towards a net tightening of credit standards. Also a worsening of banks’ risk perception regarding general economic activity and industry or firm-specific outlook contributed towards a net tightening.
With regard to the conditions and terms of credit, banks tightened credit standards by widening their margins on average loans (11%, from -19% in the previous survey) as well as via the margins on riskier loans (37%, from 2% in the previous survey). Also other terms and conditions were applied to tighten credit standards in the third quarter of 2007, such as a shortening of the maturity of loans or credit lines, a decreasing of the size of the loans or credit lines, as well as the demand for more loan covenants and collateral.
The net tightening of credit standards applied both to small and medium-sized enterprises (15%, from -7% in the previous quarter and, in particular, to the credit standards applied to large enterprises (33%, from -1% in the previous quarter). As regards loan maturities, the net tightening was somewhat more pronounced for long-term loans (30%, from -4% in the previous survey) than for short-term loans (16%, from -2% in the previous survey).
Loan demand: Compared with the strong demand for corporate loans observed over the past two years, in the third quarter of 2007 net demand for loans by enterprises slowed down, although it remained slightly positive (5% compared with 18% in the previous round. The main factor behind the still positive net demand was fixed investment, whereas financing for inventories and working capital as well as for mergers and acquisitions (M&A) and corporate restructuring contributed to the slowdown in demand. Notably, another factor contributing to positive loan demand (although to a modest extent) was the issuance of debt securities, which may suggest that some firms have turned to banks possibly owing to difficulties in tapping the corporate debt market for funding during the past weeks.
In terms of borrower size, net loan demand from small and medium-sized enterprises continued to be stronger than for large enterprises (6% and -1%, respectively). Net demand was positive across the maturity spectrum, with demand for long-term loans being somewhat stronger than for short-term loans.
Expectations: Looking ahead to the fourth quarter of 2007, banks expect a further net tightening of credit standards applied on loans to enterprises. Demand for loans by enterprises is expected to remain positive, although less than in the previous quarter. Banks also expect corporate net demand across all firm sizes and loan maturities to remain positive in the fourth quarter of 2007.
Loans to households for house purchase
Credit standards: In the third quarter of 2007, banks reported a net tightening of credit standards for housing loans to households, following a slight net easing in the previous quarter (12% from -1% in the previous survey round). The main factors behind the net tightening were a slight deterioration of banks’ balance sheet position and a worsening of housing market prospects as well as expectations regarding general economic activity. Competition from other banks continued to contribute towards a net easing, although less pronounced than in previous quarters.
The net tightening for loans for house purchase was mainly implemented via a widening of the margins on riskier loans and via higher collateral requirements and loan-to-value ratios. At the same time, margins on average loans continued to contribute to a net easing, but somewhat less than in previous quarters (-8% from -22% in the previous quarter).
Loan demand: The net demand for housing loans to households continued to be significantly negative in the second quarter of 2007 at -15% (from -22% in the previous quarter). This essentially reflected a less favourable assessment of housing market prospects and a worsening of consumer confidence. It should also be noted that the bank lending survey does not directly capture other factors affecting loan demand for house purchase, in particular the level of interest rates, which may be a main driving force behind the decline in demand.
Expectations: For the fourth quarter of 2007, respondent banks expect a further net tightening of credit standards for loans to households for house purchase. In addition, banks expect net demand to remain significantly negative over the same period.
Consumer credit and other lending to households
Credit standards: In the third quarter of 2007, banks reported a slight net easing of credit standards applied to the approval of loans to households for consumer credit and other lending, compared with basically unchanged standards in the previous quarter. (-3%, from -1% in the previous round). Competition from other banks remained the main driver behind the net easing, whereas consumer creditworthiness and risks related to the collateral demanded, as well as less favourable expectations about the general economic outlook, were the main factors contributing towards a net tightening. The net easing was mainly implemented via a lengthening of loan maturities, whereas margins on average and riskier loans contributed towards a net tightening.
Loan demand: Banks reported that net demand for consumer credit and other lending to households remained positive but basically unchanged in the third quarter of 2007 (2% compared with 5% in the previous round).
Expectations: For the fourth quarter of 2007, respondent banks expect credit standards for consumer credit and other lending to households to tighten considerably (11% compared with -3% in the previous round). Over the same period, banks expect the net demand for loans to households for consumer credit and other lending to remain basically unchanged.
Impact on credit standards
The credit market events have had a different impact on credit standards depending on the loan segments. Loans and credit lines to enterprises were more affected than loans to households. Credit standards for loans and credit lines to large enterprises, in particular, were somewhat tightened, as reported by more than one-third of the respondent banks. The credit standards for loans and credit lines to small and medium-sized enterprises were also somewhat tightened (21%), and more than those for loans to households for house purchase (10%) or for consumption and other purposes (6%).
Across all loan segments, more banks expect recent credit market events to have an effect on credit standards over the next three months than was seen over the past three months. For example, nearly 50% of the banks said that the credit market events were expected to contribute to a tightening of credit standards for loans and credit lines to large enterprises over the next three months, compared with only around 40% for the effect over the past three months.
Focusing more specifically on loans and credit lines to enterprises, the credit market events have contributed to a tightening of credit standards over the past three months, in particular for loans related to M&A and corporate restructuring: 32% of the banks reported some tightening and a further 15% reported considerable tightening. The tightening of credit standards was less pronounced for loans financing fixed investment (22%). Banks expect for the next three months more tightening of credit standards, not only for M&A and corporate restructuring related loans, but also for loans financing fixed investment. For example, 32% of the banks responded that the credit market events are expected to contribute to a tightening of credit standards for loans and credit lines to enterprises for fixed investment over the next three months, compared with 22% for the effect over the past three months.
Access to funding
Banks generally reported that the recent tensions in the credit markets have hampered their access to wholesale funding over the past three months.3 In particular, securitisation activity was hampered for the selling of loans for house purchase (80%) and corporate loans (72%) for those banks that usually engage in such activities. Banks also reported difficulties in accessing wholesale funds through the inter-bank money market. Banks had difficulties in raising funds both through medium to long-term bonds and through short-term debt securities over the past three months. Wholesale funding market access is not expected to become easier over the next three months, although there are some differences according to funding sources. Access to inter-bank and short-term debt securities markets is expected to continue to be hampered over the next three months broadly as much as they have been over the past three months, albeit at a weaker intensity (that is, a reduction in the percentage of banks responding “considerably hampered” and a corresponding increase in the percentage of banks responding “somewhat hampered”). By contrast, securitisation of corporate loans is expected to become somewhat more difficult over the next three months in comparison with the past three months.
Difficulties in accessing wholesale funding over the next three months are also expected to exert some impact on the quantity that those banks are willing to lend and/or the margin at which funds are lent over the next three months. Among those banks that expected one or more of their usual means of accessing wholesale markets to be considerably or somewhat hampered over the next three months, around 45%-65% responded that this may have some impact on lending over the next three months and a further 10% to 25% responded that this may have a considerable impact. The impact expected, irrespective of the funding source, reflects both the willing to lend and/or the margin at which funds are lent.
The willingness of some banks to lend over the next three months may be affected to some extent by the effect of the credit market events on the costs related to banks’ capital position: 41% of the banks responded that this may reflect mostly some (33%) or in a few cases a considerable (9%) impact from the credit market events on capital. At the same time, it should be noted that around half of the banks (47%) do not expect the capital position to prejudice their willingness to lend over the next three months, mostly because they do not expect the credit market events to affect the costs related to banks’ capital position at all (34%).
